How the Court of Appeals Botched Lee Rousso’s Constitutional Challenge

Earlier this week, Lee Rousso lost his bid to have Washington’s online gambling law as a violation of the dormant Commerce Clause. That constitutional doctrine prohibits states from passing legislation that improperly burden or discriminate against interstate commerce. Division Two of the Washington Court of Appeals held 3-0 that the state’s interest in regulating online gambling outweighed the law’s adverse affects.

The court was not kind to either side. At one point it called the State’s argument “severely flawed” and characterized some of its arguments as “off base” and irrelevant. It was kinder to Mr. Rousso, but not by much. It said there were “various problems” with one of his arguments and called another one “overly simplistic.” Someone had to win, however, and the court sided with the state. That’s too bad, because it was Rousso who had the law.

The law is straightforward enough. In analyzing dormant Commerce Clause cases, courts follow a two-step inquiry. First, “(w)hen a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests,” it is “generally struck down . . . without further inquiry.” Brown-Forman v. N.Y. State Liq. Auth., 476 U.S. 573 (1986); Granholm v. Heald, 544 U.S. 460, __ (2005)(numerous citations omitted). If it does neither of the above, courts proceed to a balancing test first articulated by the United States Supreme Court in Pike Church v. Bruce, __ U.S. ___ (1971):

Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. If a legitimate local purpose is found, then the question becomes one of degree. And the extent of the burden that will be tolerated will, of course, depend on the nature of the local interest involved, and on whether it could be promoted as well with a lesser impact on interstate activities.

Id. at __.

In determining whether a statute is a per se violation, the Supreme Court does not require that out-of-state economic interests be called out by name. Rather, it is sufficient that a statute’s resulting scheme have the practical effect of favoring all out-of-state economic interests while disfavoring one, some or all in-state economic interests. In Dean Milk v. City of Madison, 340 U.S. 349 (1951), for example, the Supreme Court struck down a city ordinance that required milk sold in the city of Madison to be pasteurized within five miles of the city. The Court found it “immaterial” that in-state pasteurizers outside the five-mile city limit were treated the same as out-of-state providers, 340 U.S. at 354, fn.4, because its “practical effect” was to exclude out-of-state providers from the in-state market. Id. at __. To phrase it in syllogistic terms:

In City of Philadelphia v. New Jersey, 437 U.S. 617 (1978), the Court struck down a New Jersey stature that prohibited the importation of most “solid or liquid waste which originated or was collected outside the territorial limits of the State.” Immediately affected by this law were the operators of private landfills in New Jersey and several cities in other States that had agreements with these operators for waste disposal, and they brought suit. The Court struck the statute down on per se grounds, finding New Jersey’s interest in protecting its environment and economy insufficient to overcome Commerce Clause concerns. The syllogism in that case: All in-state municipalities may access New Jersey’s landfills, but no out-of-state municipalities may access them.

More recently in Carbone v. City of Clarkstown, 511 U.S. 383 (1994), the Court struck down a flow ordinance statute that required all solid waste leaving a municipality to be processed through a particular transfer facility within that municipality. The Court treated the ordinance in Carbone as a per se case, even though it excluded both in-state and out-of-state processors (save one) equally. The reason: the government body in question “hoarded” the article of commerce for the benefit of an in-state provider to the exclusion of out-of-state providers, so the presence of some in-state providers in the excluded class was, to borrow from Dean Milk, “immaterial.” 511 U.S. at 391. Justice Kennedy discussed several past cases in which the Court struck down statutes on the grounds that out-of-state economic interests could not, by definition, get within the protected category of economic interests. 511 U.S. at 391 (citing Minnesota v. Barber, 136 U.S. 313 (1890) (striking down a Minnesota statute that required any meat sold within the State, whether originating within or without the State, to be examined by an inspector within the State); Foster-Fountain Packing Co. v. Haydel, 278 U.S. 1 (1928) (striking down Louisiana statute that forbade shrimp to be exported unless the heads and hulls had first been removed within state); Johnson v. Haydel, 278 U.S. 16 (1928) (striking down analogous Louisiana statute for oysters); Toomer v. Wits ell, 334 U.S. 385 (1948) (striking down South Carolina statute that required shrimp fishermen to unload, pack, and stamp their catch before shipping it to another State). Each of these cases involved a statute that created a de facto “some v. no” economic syllogism such as the one here, supra — and each of them was struck down as a per se violation of the dormant Commerce Clause.[3]

Taken together, this line of cases stands for the following proposition. Where a statute sets of a scheme such that no out-of-state economic interests may access a given in-state market, that statute is a per se violation of the dormant commerce clause, even though some in-state providers may also be in the disfavored class.

Here, Washington’s online gambling law treats in-state gambling providers differently than out-of-state ones. Although the law appears, at first blush, to be a facially neutral statute (in the words of Brown-Forman, it does not “directly discriminate” against interstate commerce), its “practical effect” is to cut off Washington’s gambling market from those companies who would import their gambling services into Washington via the Internet. That’s because out-of-state operators have no other way of accessing Washington’s market other than the Internet. In-state operators, by contrast, do not need the Internet to provide their gambling services — they have land-based casinos. Thus:

The statute is equally infirm as applied to customers, albeit for converse reasons. Recall that RCW 9.46.240 makes it illegal to transmit and receive gambling information over the Internet; Washington turned the customers it was purportedly protecting into Class C felons. Thus, the statute creates the following syllogism for players.

Players may purchase gambling services provided by some in-state providers.
Players may not purchase gambling services provided by out-of-state providers.

This is the same “some versus none” syllogism that the Supreme Court has struck down again and again.

No doubt Rousso will appeal this loss to the Washington State Supreme Court. Here’s hoping he gets a better shake.